NEW YORK — Salomon Bros.' "squeeze" of the government securities market last May triggered millions of dollars in losses among rival New York Stock Exchange member firms as well as job losses among traders, a Big Board executive said Thursday in Washington.
Edward Kwalwasser, NYSE executive vice president, told reporters that the exchange had spoken to at least two firms that had been hurt by the squeeze, which caused a surge in the price of two-year Treasury notes, according to Reuters.
"I'm sure that all the other firms that shorted into that market had the same problem," the official told reporters after a Senate subcommittee hearing on the government securities scandal.
The term "shorting" refers to the sale of borrowed securities in the hope of making a profit by repurchasing after they have dropped in price. An investor returns the securities and pockets the price difference, minus a commission. Because Salomon controlled a staggering 94% of the two-year notes that were available at the May auction, prices went up sharply, "squeezing" rival firms that had sold short. They had no choice but to turn to Salomon to cover their positions at a loss.
A Big Board spokeswoman in New York confirmed that Kwalwasser had made the remarks.
Salomon also said it violated Treasury auction rules by bidding for more securities than the 35% of an issue that is permitted and by placing phony or unauthorized bids on behalf of customers.
The NYSE spokeswoman said she did not know how many firms were hurt by the price surge. But observers said Thursday's disclosure will add to Salomon's growing legal woes, perhaps prompting firms that lost money to sue Salomon in attempts to recover their losses.
Kwalwasser was not specific about the exact losses or the number of traders who lost their jobs from the squeeze, saying the latter was "some" or "a few."
Kwalwasser also said the exchange had unearthed documentation problems during a regular review of Salomon's financial records in April.
"They were not in strict compliance with our rules," he said, adding that the situation did not have a material impact on the firm. He added that the situation had been resolved.
Also, at the hearing, Kwalwasser was joined by Joseph Hardiman, president of the National Assn. of Securities Dealers, in calling for more automation in the government securities markets.
The $2.3-trillion government securities market is famous for its antiquated procedures. The officials told the panel that a greater degree of automation might have prevented the abuses perpetrated by Salomon.
"There is no reason in today's electronic world and Information Age why we can't supply a much more sophisticated degree of automation in the auction process as well as the secondary market," Hardiman said.
Meanwhile, S. G. Warburg Group PLC, after meeting with officials from the Treasury and the Federal Reserve, said it was confident the firm had not committed any misconduct of its own during the Salomon scandal.
On Wednesday, regulators said Warburg apparently knew of Salomon's misdeeds in the auctions but kept quiet about the affair.
"We answered all the questions and . . . remain confident that these inquiries will conclude that all allegations of wrongdoing by Warburg or its affiliate are without foundation," Warburg said.